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What I read this week: EMs have turned minefield & why India is outperforming

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Updated: Sep 04, 2018, 12.10 PM IST

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Christopher Wood of Greed & Fear fame has taken note of Indian market’s outperformance in the Asian markets.

One popular way to measure the relative attractiveness of a stock in a particular sector, region or country is to calculate the percentage of stocks in a group that are currently flashing a red performance alert. And that measure for emerging markets is blinking red. And for India, it’s even more alarming with 52.5 per cent of all stocks flashing a performance alert and only 18.6 per cent showing a positive trend!

Christopher Wood of Greed & Fear fame has taken note of Indian market’s outperformance in the Asian and emerging markets context in dollar terms and has tried to find the reasons behind it.

And in oil market, while prices weakened some bit over past few weeks, the outlook is grim with inventories depleting across the world. In emerging market currency terms, oil is just 5 per cent short of its 2008 high.

All of that and more in this week’s column, which I hope has enough to tickle your grey cells. I reiterate that this is only a sampling of some of the best content I read through the week, with a dash of my own thoughts.

Until next time…

Picking stocks in EMs is like walking on a minefieldGavekal Writes in its Knowledge Blog....Chalk it up to strength of the US dollar, trade, policy risk, or whatever, stocks outside of the US are in bad shape. One of the ways we systematically measure the relative attractiveness of a stock in a particular sector, region or country is to calculate the percent of stocks in a group that are currently flashing a red performance alert. A performance alert is activated when a stock has a combination of negative short-term, intermediate-term and long-term trends relative to the global equity market and it is a strong indicator that a particular issue is at risk of further underperformance (this is the proprietary knowledge). At the same time, they calculate the percent of issues with a positive overall trend, which helps them identify areas of relative strength.

In the US, only about 28 per cent of stocks are flashing a performance alert, which is a relatively modest number. Whereas in case of India 52.5 per cent of all stocks are flashing performance alert with only 18.6 per cent in positive trend.

To sum things up, on the basis of their performance alert measure, US is the only major market without a preponderance of stocks in a risky position. In DM ex US and EM, picking stocks is like walking through a minefield.
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Why India is outperformingChristopher Wood, who writes GREED & Fear ......is surprised by the extent of Indian outperformance year-to-date in an Asia and emerging market context in US dollar terms. So, GREED & Fear suspects, are many fund managers.

The Indian outperformance has become quiet marked. The MSCI India Index has declined by only 1.3 per cent in US dollar terms year-to-date, while the MSCI AC Asia Pacific ex-Japan Index and the MSCI Emerging Markets Index are down 5.1 per cent and 7.6 per cent respectively over the same period.

Why has India been so resilient and defied bearish expectations? One reason is that India, as primarily a domestic-driven economy, is clearly much less exposed to Trump-driven trade concerns. But in GREED & fear’s view the stock market’s resilience may also be a sign that India is contra cyclical in the sense that the economy is accelerating at a time when many other markets in Asia could be near their cyclical peak. In this respect, it needs to be remembered that it is 10 years since the last investment cycle peaked. The gross fixed capital formation to nominal GDP ratio has declined from an estimated 36 per cent in FY08 to 28.5 per cent in the past three fiscal years . When that new investment cycle commences it will be very bullish for the stock market. This is the main reason why GREED & fear has been less concerned about the undoubtedly high valuations in India.

India's corporate profit as per cent of GDP has declined from 7.1 per cent in FY08 to 3.1 per cent in FY18 ended 31 and is in the process of bottoming out. But it must be noted that the Capex cycle has still not picked up and the economy is still dependent upon borrowed consumption spending and mortgage. How long will this sustain is a million-dollar question?
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Oil is just 5 per cent short of its 2008 high in EM currenciesMacrostrategy Partnership Writes...…"Energy rose to 6.52 per cent of world GDP, the highest percentage since 2014, driven by new highs in Asian LNG prices which reached USD11.635mBTU. Inventories were depleted during the summer and have to be rebuilt ahead of the winter.

Deliveries of term cargoes have also been affected by project delays and production line problems. In terms of oil, Reuters reports that the floating storage that had built around northwest Europe, the Mediterranean and West Africa over July and August was rapidly draining, down from 30 cargoes just a week ago to no more than a handful now as Iran’s exports fall. In emerging market currency terms, oil is just 5 per cent short of its 2008 high".

Conclusion: The LNG prices are rising, Oil at sea is rapidly disappearing, and shale gas companies are either cutting down capex or buying back their shares when they should be putting more money into exploration. Higher energy prices in rapidly depreciating falling local currencies could add to EM woes.
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Modern version of Economic HitmanThe New York Times bestseller Confessions of an Economic Hitman (2004) by John Perkins is a confession of his time at a private US consulting group that deliberately raised the debt of third world countries. Translated into thirty-two languages, the book is similar to author Michael Lewis’s insider exposés on Wall Street.

In Boston, Perkins is recruited by Chas. T. Main, Inc. (referred to as MAIN for most of the book), an elite consultant group specializing in large scale engineering projects.

Though he has no training in economic forecast models, Perkins successfully bluffs his way through, appeasing his bosses and convincing representatives of poor countries to accept large loans they are unlikely to pay back.

Perkins travels to Kuwait and is trained by a woman to be, what he calls, an Economic Hit Man (EHM). He learns that his job as an economist will be to convince foreign governments to accept large, unfair loans for various construction projects. The sites include dams, power plants, airports, and highways. Once countries inevitably default on the loans, they come under the control of The World Bank or The International Monetary Fund. The creditors have substantial US ties, and when the US wants favorable treatment in certain areas, it can have its representatives deal (some would say exhort) favorable outcomes from these poor countries.

According to Perkins, some of these past favors included a favorable UN vote, access to oil extraction, or an agreement to build a military base within the country’s borders. Along with a diplomatic advantage, the US gains an economic advantage because these less developed countries (LDC in the book) become beholden to US companies like Bechtel, Halliburton, and Boeing.

Perkins travels to the Indonesian capital, Jakarta, for work. He is amazed by the gap between poor and rich and sees beautiful, well-dressed women walking down the same streets as beggars their own age. He learns that the policies he presents helps the local elite, but are not designed to help the poor at all. He repeats the process he completed in Indonesia through dozens of other less developed countries, including Iran, Ecuador, Saudi Arabia, and Panama.

Perkins comments on how often corporations and upper management relied on people with his temperament — kind and optimistic — to exploit for their more strategic, often nefarious goals. To get through his participation in an unjust system, Perkins tells himself that he is very good at what he does, and he is not actually coercing these countries to accept these shady deals.

Perkins experiences a wide array of amoral and shocking things. He is encouraged to ask a friend to be a prostitute and hears Panamanian President Omar Torrijos’s fear of assassination first hand (a fear that would be realized). Eventually, Perkins starts to feel more like a hit man against these poorer countries. Though employed by a private company, he feels that his true employer is the US government. In 1980, he quits.